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Highlights
- Inflation remains a key concern for Australia's economy.
- Property prices and construction demand are driving inflation.
- Companies in the construction sector face challenges due to weak demand.
Australia’s ongoing fixation on property ownership is becoming a major issue, particularly as inflation continues to weigh heavily on the economy. As the ASX moves in tandem with Wall Street, broader macroeconomic concerns linger. With global conflicts like Russia-Ukraine and Middle East tensions in a stagnant state, attention is turning toward domestic factors, especially inflation.
The upcoming release of Australia's Consumer Price Index (CPI) data for the September quarter, scheduled for October 30, is being closely watched. This report could provide key insights into the country’s economic trajectory. Several indicators suggest inflation in Australia might remain persistently high, with implications for the local stock market.
One primary concern is Australia’s labour market, with unemployment holding steady at 4.1%. A strong job market generally leads to higher consumer spending, which can further drive inflation. The International Monetary Fund (IMF) has also projected that Australian inflation will stay above 3% until the end of 2025. If this forecast holds, Australia may face prolonged inflationary pressures, second only to Slovakia among developed economies in this regard.
A separate forecast from TradingEconomics for the third quarter of 2024 anticipates that inflation will remain unchanged at 3.8%. If these predictions are accurate, the ASX200 could see significant downward pressure, especially given the weight of quarterly CPI data in influencing market sentiment. Sticky inflation raises the likelihood of further monetary policy tightening by the Reserve Bank of Australia (RBA) in the coming year.
Adding to these inflationary pressures is Australia’s housing market. The Australian Bureau of Statistics (ABS) has long pointed to the "shelter" category of CPI, which includes housing costs, as a leading driver of inflation. Property prices continue to rise, fueled by strong demand and low supply. This trend shows no signs of reversing, with the country’s property obsession contributing to stubborn inflation.
In the construction sector, two major companies have signaled concerns about the current state of demand for building materials. Brickworks (ASX:BKW) and Fletcher Building (ASX:FBU) have both reported weak demand, which could further exacerbate supply constraints in the property market. Fletcher Building noted a drop in demand by 10% to 15% in the third quarter, while Brickworks foresees weak demand extending into 2026.
As demand for construction materials declines, so too does the volume of new construction projects. This, coupled with rising property prices due to limited housing supply, could mean that inflation will continue to slow at a sluggish pace. Additionally, rising immigration could further strain the housing market, keeping inflation elevated for an extended period.
Australia’s deep-rooted property obsession, combined with weak construction demand, is likely to have long-term economic repercussions. While the RBA may attempt to address inflation, the fundamental issues driving price increases, particularly in housing, remain unresolved.
